How To Self-Insure Your Car And Save Thousands (Maybe)

October 24, 2016

In past posts, I’ve suggested self-insuring to save money. Insurance companies have figured out the odds of you filing a claim and have set the premiums accordingly. They probably won’t make money on you every year, and likely will lose money on you some years. Over time, however, they will collect more in premiums than payouts. The less insurance you carry, the more you will save. Learning how to self-insure your car is a great place to start.

Don’t Completely Self-Insure

Before we go any further, there is one kind of car insurance that you should not get rid of- liability insurance. Most car insurance covers damage done to your vehicle, or done to you. Liability insurance, however, covers damage that you do to others when you are at fault.

If you were to fall asleep, veer off the road, and plow into someone’s house, you would be responsible for paying for all the damage. If (heaven forbid), you were at fault in an accident involving loss of life, you would again be responsible for a large sum in damages. For most drivers, liability insurance is relatively cheap, since the odds of such catastrophic accidents are slim. The total possible damage, however, is technically limitless. If by chance you are involved in such an accident, the odds become irrelevant and your finances will have been dealt a crippling blow.

Fortunately most states require liability insurance. But if you happen to live in New Hampshire or Virginia or somewhere like that, don’t even be tempted to skip out on liability insurance.

Why You Can Consider Removing Comprehensive and Collision Coverage

Comprehensive and collision coverage is the part of auto insurance that covers damage done to your car. Collision coverage covers your car in an accident that where you were at fault or no fault was determined. If your car is damaged and someone else is at fault, typically their liability insurance covers your car, although this again varies from state to state. Comprehensive coverage covers damage to your car by something other than an accident. Comprehensive insurance covers your car if a tree falls on your car, your car incurs hail damage, or your car is damaged in a break in, just to name a few scenarios.

Regardless of the number of scenarios that you can think of, the total amount of possible damage to your car is always limited to the total value of the car. Furthermore, even if you do completely destroy your car, you don’t have to replace it with an equal valued car. You can always settle for a thousand dollar beater. True, not ideal… but still one of your last resort options. The point is, comprehensive and collision coverage don’t protect you from catastrophic loss, so they are products that you can at least consider living without. The only exception is if you financed your vehicle. You don’t want to be stuck making payments on a car you no longer have.

How to Self-Insure Your Car

When you self insure, you do need a larger emergency fund to cover any damages that you do incur. This can either be a part of your regular emergency fund, or a separate ‘car replacement and repair’ fund. You still need to regularly contribute to this fund, just as you would regularly pay premiums. However, over time, this emergency fund will slowly grow as the ‘premiums’ you pay exceed what you withdraw.

To figure out how much to contribute to your fund, get a quote for full coverage with $0 deductibles. When you enroll in just liability or whatever minimum insurance you’re comfortable with, subtract your current premium from the full coverage premium. This amount is how much you should contribute to the ‘car replacement and repair’ emergency fund.

For example, if your quote for full coverage is $90/month, but you pay just $40/month for only liability coverage, $50 goes into your car emergency fund each month. This $50 is in addition to the amount you’re already saving for other.

Gradually Self-Insuring

If you currently have full coverage with low deductibles, I would not suggest going straight to liability only. Instead, you can first gradually increase the deductible on your insurance. The deductible is the amount that you pay out-of-pocket before your insurance kicks in. So the larger your emergency fund grows, the larger a deductible you can live with. Typically, you can increase your deductible up to $1000, although some insurances will allow you to go higher.

One thing to note- keep the deductible even between your comprehensive and collision coverage. Don’t try to get rid of one first before starting on the other. If you’re prepared to handle $500 worth of expenses when a tree falls on your car, you’re also prepared to handle $500 worth of expenses if you t-bone someone at a stop sign. There’s no point in having a $1000 deductible on one, and a $200 deductible on the other. And there’s especially no point in not having one at all while you’re still paying for the other. Unfortunately, when your car gets damaged, you don’t get to pick how it gets damaged.

Finding Your Sweet Spot

Reducing your insurance can be terrifying for some people. Carrying less insurance increases unpredictability and does admittedly make budgeting for emergencies a little harder. There’s no cosmic rule that says you can’t have 2 accidents in the same month (or the same week). While extremely unlikely, You might even be unfortunate enough to have an accident a year for 20 years straight. Self insuring or carrying a higher deductible would probably mean you’d come out behind in this case. If this is a risk that you can’t handle, self insuring is probably not worth the stomach ulcers that you’d incur. Perhaps simply raising your deductible is better for you. By raising your deductible, you still are covering yourself from the worst, but will still see significantly lower premiums.

You’ll also likely be more comfortably going with liability only on older, less valuable cars. Totaling a 10 year old Chevy will be a lot less painful than totaling a 2 year old BMW (or even a 10 year old BMW)*. Personally, I am comfortable putting liability-only coverage on any cars worth less than $8,000. If the vehicle is worth any more than that, I’ll put full coverage on it until it depreciates under $8000. However, my full coverage still has the maximum deductible, so the full coverage only costs me an extra $20/month.

Life’s a Gamble

Admittedly, reducing insurance is a huge gamble. The more you reduce your insurance, the more potential loss. However, unlike the casino, this is a gamble where the odds are in your favor. In the financial world, and in all of life, there’s a strong correlation between risk and reward. The more risk you take on in your investing, career track, entrepreneurship or insurance, the more you stand to gain. Push your comfort zone- just not to the point of a mental breakdown.

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*Shockingly, insurance companies also know that it costs more to replace a more expensive car. Therefore, your comprehensive and collision premiums will be much higher on a $40,000 dollar car than on a $10,000 dollar car. Another reason to keep your old car around for a little longer.

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While I do strive to only write accurate information and dispense valuable advice, I am not a licensed financial adviser. All information is based solely on my personal experience and personal research and should be treated as such. Find out more.